A total market index is a benchmark used by the financial industry to monitor the risk and returns of an entire market. It includes publicly traded companies listed on a country’s major stock exchanges and is weighted based on each company’s contribution to the overall index price. Different weighting methodologies are used, such as market capitalization, price-weighted, float-adjusted, and equal weight.
A total market index is a collection of publicly traded companies with stock offerings listed on a particular country’s major stock exchanges. The weighted performance of the list is used as a benchmark by the financial industry to monitor the risk and returns of an entire market. Various financial firms, such as Standard and Poor’s (S&P), publish a total market index to help investors and financial analysts make investment decisions and evaluate the performance of a stock portfolio or mutual fund against the performance of the market over the as a whole.
Most stock markets in every country have a total market index that is compiled and published by one or more financial services firms. The index typically includes all, or nearly all, publicly traded companies that are headquartered in that country, issue shares, and are listed on the country’s major stock exchanges. For example, the Russell / Nomura Total Market Index includes data from 98% of companies listed on the Japanese Stock Exchange. Since a total market index evaluates the performance of an entire market, it is often cited as an indication of investor confidence in the country’s economy.
In the United States, the Wilshire 5000 and the S&P Total Market Index are two of the most cited total market indices. A public company is included in the index if the company is headquartered in the United States, issues shares and is listed on the New York, American or NASDAQ stock exchanges. However, all companies included in the index are not treated equally in composite value analysis. Each listed company’s contribution to the overall index price is weighted, so some companies have a greater influence on the index price fluctuation than other companies.
An index may choose a variety of weighting methods for the companies it includes to determine the overall index price. A standard total market index typically uses a market capitalization paradigm that gives more weight to the largest companies that have the largest market share. For example, 500 of the largest companies out of more than 6,000 companies listed on the Wilshire 5000 account for more than 70 percent of the total index value. The Wilshire 5000, as well as other total market indices, are available in multiple versions that use different weighting methodologies, including price-weighted, float-adjusted, and equal weight, which differ based on how the shares and dividends are covered in the evaluation.
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